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President Putin signs corporate law amendments to Civil Code

On 5 May 2014, President Vladimir Putin signed the seventh set of amendments to the corporate law provisions of the Civil Code of the Russian Federation. The new changes to the law clarify the division of legal entities into corporate and unitary organizations, as well as the regulations governing the formation, management, and liquidation of legal entities.

Above all, the new version of the Civil Code provides division of legal entities into corporate (the founders, participants or members of which may enjoy the right of management) and unitary (the founders of which cannot be members and acquire any membership in) enterprises. The Civil Code includes general provisions related to commercial and non-commercial corporations. Such forms of commercial legal entities as Company with Supplementary Liability and Closed Joint-Stock Company to be eliminated. A new legal structure for non-commercial organizations is introduced – Landowner Partnership.

Amendments introduce the provision that adds complexity to the protection of minority shareholder rights. A member of corporation or a corporation, that claim the recovery of incurred damages or the invalidation of corporation’s transaction / enforcement of implications of invalidated transaction, must take reasonable measures to notify in advance the other members of corporation and the corporation of his intention to file a lawsuit in court, and to provide them with other relevant to the case information. Procedure of notification is not governed by the amendments, but it may be specified in the laws on Joint-Stock Companies and Limited Liability Companies and in incorporation documents of corporations.

The businesses interpreted such amendments quite negatively as it sees possibility of preventing the suits of minority shareholders against directors’ liability. Though the Chair of the special-purpose committee of the State Duma, Pavel Krasheninnikov, assured the investors that there is no reason to be worried since the laws on Joint-Stock Companies and Limited Liability Companies to be modified that aimed to securing companies from too many lawsuits.

But a more serious limitation is the deprivation of the right to file a lawsuit in case the member (shareholder) fails to join the original lawsuit: they will not be able to apply to court on identical demands, "unless the court finds such acts justifiable". Lawyers skeptically perceived this provision as this materially impedes the protection of minority rights.

One significant legislative innovation is that the Civil Code will stipulate liability of authorized persons who act on behalf of legal entity. Under amendments, it is allowed to assign the property liability to majority shareholder for damages incurred by the legal entity through his fault. Also, it is provided to contemplate the joint and several liability to members of management bodies, majority shareholders and persons actually arranging (controlling) the activities of organization who jointly damaged the legal entity. All these persons must recover damages inflicted to the legal entity, if evidenced that they, in the course of exercising rights and fulfilling duties, acted in bad faith or unreasonably, such as if their acts (omissions) did not stand with the ordinary terms of civil commerce or usual entrepreneurial risk.

The rules on reorganization and winding-up of legal entities will be simplified. It will be possible to implement the combined reorganization, simultaneous reorganization of several persons, including entities of various business legal structures, and the special regulation on consequences of invalidated reorganization to be introduced soon. Amendments to the Civil Code that warrant the rights of creditors to reorganized legal entity will be in operation. The new Civil Code provides joint liability for newly founded legal entities to their dated debts if it is found impossible to appoint the legal successor or if the assets are unfairly apportioned among them, provided such led to the significant infringement of creditors’ interests.

Amendments provide general provisions for corporate agreements which are now known to the Russian legislation to some extent. In general, the legislators regard the logic of shareholder agreements and agreements on execution of company member rights through specifying certain provisions under the Civil Code.

Similar to shareholder agreement, the corporate agreement is concluded with purpose to bind its parties to exercise the corporate rights in a certain manner or to refrain from its exercising. Therefore, the Civil Code clarifies paragraph 2 of Article 32.1 of the law on Joint-Stock Companies: under corporate agreement, its participants shall not be bound to vote in accordance with the instructions of the company bodies, in respect of shares (equity interest) to which the agreement is concluded, and to define the company structure and the competence of each body, unless applicable under company charter and in compliance with the law (the current version of the law on Joint-Stock Companies stipulates direct ban on compelled voting pursuant to the instructions of management bodies of company).

It should be noted that the new Civil Code now contains the express reference that the corporate agreement shall be given the priority over company charter to its parties, and the parties to corporate agreement shall not refer to its invalidity on grounds that it is not in compliance with company charter.

In every case following the conclusion of corporate agreement, its parties have to notify the company of such fact. If the aforementioned persons fail to fulfill the duty, the members of company who are not parties to corporate agreement, are entitled to seek damages inflicted to them.

Amendments introduce an important provision that has never been subject to the law. Now the disregard of corporate agreement will be a cause for invalidating decision of company body through filing a lawsuit by party to agreement, if, at the time of making respective decision by the body of company, all members of business company were parties to corporate agreement. This provision directly contradicts the existing edition of Article 32.1 of the law on Joint-Stock Companies, which provides that the breach of shareholder agreement cannot be a cause for invalidating decisions of company bodies.

The new Civil Code also indicates that the invalidity of decisions by management body does not lead to ineffectiveness of transactions executed with third persons under that decision. Such transaction may be held invalid by court award only provided that the other transacting party was or should have been aware of abridgements pursuant to the corporate agreement.

Rules on corporate agreements are accordingly applicable to the agreement on foundation of economic society, unless otherwise established by law or followed by the nature of such contractual relations.

A new provision is that the creditors and other third persons to company may conclude a corporate agreement with members of company, under which the latter shall exercise their corporate rights in a certain manner or refrain from exercising, concertedly perform any acts concerning the management of company.

Amendments will enter into force as of 2014.09.01 except where other effective dates are designated.

Source: (State legal information system)